ATLANTA OFFICE ADDRESS:
1100 PEACHTREE STREET
SUITE 200
ATLANTA, GA 30309
PHONE: 404-872-4343
FAX: 404-872-4315
Association Construction Law Section,
and is a frequent speaker and author on
a wide variety of issues related to the
construction industry at both the national
and local levels. Ms. Cole’s commitment
to the industry is further demonstrated

through her involvement with the
Contract Documents Committee of
the Associated General Contractors
of America and the subcommittee
developing joint-venture and teaming
agreements for ConsensusDOCS; her
membership in the National Association
of Women in Construction and prior
service on the Board of Directors for the
Atlanta Chapter; and her participation in
local chapters of the Associated Builders
and Contractors of America and DesignBuild Institute of America.

In 2012, Chambers USA, a legal
directory
featuring
client-led
intelligence on America’s leading
lawyers, included Ms. Cole among a
select group ranked as the leading
construction attorneys in Georgia.
In light of her accomplishments, Ms.
Cole has also been recognized for the
past three years as a Georgia Super
Lawyer in the field of construction
litigation - one of only two female
attorneys in Georgia ever to receive
this honor. n

Peckar & Abramson
is pleased to an­
nounce the opening
of its Atlanta, Georgia,
office on the first
of August. We are
Danielle
also pleased to
Cole
announce
that
Danielle Cole has joined the firm as
Partner in our new Atlanta office. Ms.
Cole represents general contractors,
construction managers and other
project participants, providing counsel,
advocacy and assistance prior to bid
submission, during the preconstruction
and construction phases, and after
project closeout. Her practice activities
include assisting with bid submissions;
negotiating and drafting various contract
documents and ancillary agreements;
assisting with project administration
and dispute avoid­ance; representing
clients in com­plex mediation, litigation
and arbitration proceedings; and serving
as corporate counsel.
Ms. Cole enjoys an outstanding reputation among the construction bar,
based on her significant professional
achievements and her long-standing
involvement in the American Bar
Association’s Forum on the Construction
Industry, which she actively serves
in various leadership roles. She is the
immediate past chair of the Atlanta Bar
continued on page 12

FEE SHIFTING
IN CONSTRUCTION
DISPUTES:
A MOVEMENT
BUILDING

Charles F. Kenny, Partner
Charles F.
Kenny

and Scott G. Kearns, Associate

In January 2012, the District Court of New Jersey (Hon. Freida
Wolfson, U.S.D.J.) handed down an unpublished opinion in
the matter Hunt Construction Group, Inc. v. The Hun School
of Princeton. Judge Wolfson’s opinion will be applauded by
general contractors inasmuch as it enforces against a
subcontractor three separate fee-shifting provisions
contained in a construction subcontract. But construction
Scott G.
Kearns

attorneys should take caution that the requirements for
securing an attorneys’ fee award are rigid and, if not properly
addressed, can turn a lucrative attorneys’ fee award into a
costly and frustrating exercise.

continued on page 2

continued from page 1

FEE-SHIFTING IN CONSTRUCTION DISPUTES: A MOVEMENT BUILDING

hours reasonably expended, the Supreme
Court has held that courts will look to the
following factors, which derive from Rule of
Professional Conduct 1.5 (“Reasonableness
of Fees”):
1. the time and labor required, the
novelty and difficulty of the questions
involved, and the skill requisite to
perform the legal service properly;
2. the likelihood, if apparent to the client,
that the acceptance of the particular
employment will preclude other
employment by the lawyer;

3
2

In Hunt, plaintiff/general contractor Hunt
Construction Group, Inc. (Hunt) was hired
by The Hun School of Princeton (School)
to construct a new athletic building
and to renovate an existing building at
the School’s campus. Hunt contended
that the School failed to pay it for work
performed, and commenced suit in
the District Court of New Jersey. The
School asserted counterclaims against
Hunt alleging that construction defects
had twice caused flood damage to the
gymnasium floor, and, on that basis, the
School withheld payment from Hunt as
a set off against its remediation costs.
Hunt also asserted an indemnification
claim against its grading/excavation
subcontractor, Interstate Industrial Corp.
(Interstate). Hunt ultimately moved for,
and was granted summary judgment
dismissing the School’s counterclaims. It
was also granted summary judgment in
connection with its indemnification claim
against Interstate, seeking to recover its
attorneys’ fees and costs.
In connection with Hunt’s subsequent
fee application, Judge Wolfson held that
three fee shifting provisions in the HuntInterstate subcontract were enforceable.
The court’s willingness to enforce these
fee-shifting provisions is noteworthy
given that New Jersey’s Supreme Court
previously held, in Litton Ind. Inc. v. IMO
Ind. Inc.,1 that such provisions are to be
strictly construed “in light of [New Jersey’s]
general policy disfavoring the award of
attorneys’ fees.”2 General contractors may
want to consider adding variations of each

of these provisions to their construction
subcontracts.
First, the court awarded Hunt, as against
Interstate, the attorneys’ fees and costs that
Hunt incurred in defending the School’s
counterclaims, which sought to hold Hunt
responsible for flood damage caused by
Interstate. The award was founded upon a
subcontract clause that provided:

who may be responsible, including,
without limitation, costs of litigation
…and reasonable attorneys’ fees and
disbursements.
Lastly, Hunt was awarded the attorneys’
fees and costs it incurred in connection
with its indemnification claim against
Interstate, based upon a clause that read:

If the Owner of a third party brings
a claim against Hunt and such claim
arises directly, or indirectly, in whole
or in part from Subcontractor’s Work
or other involvement in the Project,
Subcontractor shall:

[s]hould any dispute between Hunt
and the Subcontractor proceed to …
court, that forum shall award to the
prevailing party all of its attorneys’
fees, disbursements or costs as
defined in Section 33.6 incurred in
connection with the prosecution or
defense of the dispute.3

(c): indemnify and hold Hunt harmless
from the cost of any judgment or
settlement of such claim, Hunt’s
reasonable costs in responding to
the claim, and Hunt’s reasonable
attorneys’ fees and disbursements.

Having established that these fee-shifting
clauses were enforceable, and entitled
Hunt to recover its attorneys’ fees, the court
turned its attention to the question of how
to compute the attorneys’ fee award.

Second, Hunt was awarded, as against
Interstate, the attorneys’ fees and costs
Hunt incurred in pursuing payment from
the School, which included payment of
sums that were owed by Hunt to Interstate,
based upon a clause that read:
Subcontractor shall cooperate in
the prosecution of claims filed by
[Hunt], and shall reimburse Hunt
for all expenses and costs incurred
by Hunt in connection with the
preparation and prosecution of
such claims against Owner or others

In New Jersey, attorneys’ fee awards are
commonly based upon a lodestar. The
term lodestar derives from Middle English
and generally means, “the star that
guides.”4 Some believe that the term was
first coined by the Third Circuit in Lindy
Bros. Builders Inc. v. American Radiator
and Stnd. Sanitary Corp.5
The lodestar is commonly understood to
mean the number of hours reasonably
expended by the successful party’s counsel
in the litigation, multiplied by a reasonable
hourly rate.6 In determining the number of

3. the fee customarily charged in the
locality for similar legal services;
4. the amount involved and the result
obtained;
5. the time limitations imposed by the
client or by the circumstances;
6. the nature and length of the
professional relationship with the
client;
7. the experience, reputation, and ability
of the lawyer or lawyers performing the
services;
8. whether the fee is fixed or contingent.7
In determining the reasonableness of
the hourly rate charged, courts will
compare the hourly rate charged by
the prevailing attorney against the
hourly rate charged for similar services
by lawyers of reasonably comparable
skill, experience and reputation in the
community. 8 The resulting analysis
can be very time-intensive and places
the prevailing attorney in the difficult
position of having to defend his and

her time entries against the criticism
of an adversary who has every reason
to attack them on a line-item-by-lineitem basis. However, as unpleasant as
the task may be, the District Court, in
Hunt, reiterated the need for counsel
to perform this lodestar analysis.
Since neither Hunt nor Interstate
performed the lodestar analysis, the
District Court held that it was unable
to determine the amount of attorneys’
fees and costs to award Hunt and
referred the matter to a Special Master
for consideration.
Parties seeking to avoid the lodestar
analysis have an alternative. In both
Hunt and Litton, the courts invited
litigants to include in their contracts an
alternative approach to determining the
reasonableness of an attorneys’ fee award.
In Hunt, the court stated that “[a]s the New
Jersey Supreme Court has made clear
in Litton, courts must apply the lodestar
factors unless an alternative methodology
for determining the reasonableness of an
attorneys’ fee request is specified in the
parties’ agreement.” Likewise, in Litton, the
court held that:
Although the parties could have
expressly provided in the contract
what approach would be utilized
in the absence of express language
in the agreement, we resort to our
jurisprudence for attorneys’ feeshifting cases … in recognition of the
fact that the parties to a contract are
presumed to know the relevant legal
principles and to have adopted them
if they have not expressed a different
understanding.9

Thus, the parties would do well, at the
contract stage, to consider whether they
can agree upon a less time-consuming
and invasive manner of computing
the reasonableness of an attorneys’ fee
award.
The move toward fee shifting in
construction cases goes beyond the
courts to include arbitration proceedings.
Given that arbitration clauses are
commonly included in construction
contracts, it is noteworthy that the
Uniform Arbitration Act provides, at
N.J.S.A. 2A:23B-21(b), that: “An arbitrator
may award reasonable attorneys’ fees and
other reasonable expenses of arbitration
if such an award is authorized by law in
a civil action involving the same claim or
by the agreement of the parties to the
arbitration proceeding.”
Accordingly, parties can expect that feeshifting contract provisions will be equally
enforced in arbitrations as in the courts.
Contractors should consider including
these fee-shifting provisions in contracts
that mandate arbitration as the vehicle for
resolving disputes.
This trend toward fee shifting in
construction cases has not gone unnoticed
by insurers. At least one carrier, Zurich,
now offers contract litigation insurance
which covers the risk of having to pay
attorneys’ fees in connection with a breach
of contract award.10
The Hunt case is another development
in the ongoing movement toward fee
shifting in construction cases, for better or
worse. n

As government contractors know, when a contractor submits a claim to the federal
government that exceeds $100,000, that claim must be certified. The contractor must certify
that the claim is made in good faith, that the supporting data are accurate and complete to
Lori Ann
Lange

the best of the contractor’s knowledge and belief, and that the amount requested accurately
reflects the contract adjustment for which the contractor believes the government is liable.
As once again demonstrated by the Court of Federal Claims’ decision in Railway Logistics Int’l
v. United States, contractors that inflate the amount of their claims may subject themselves to
False Claims Act liability and forfeiture of their claims.

4
5

5
6

The False Claims Act prohibits contractors
from knowingly presenting, or causing to
be presented, a false or fraudulent claim
for payment or approval; knowingly
making, using, or causing to be made
or used, a false record or statement
material to a false or fraudulent claim;
and conspiracy to violate the Act.
Contractors who violate the False Claims
Act may be subject to civil penalties of
up to $11,000 for each false claim, as well
as treble damages in instances where the
government has paid the false claim. In
addition, the contractor may forfeit not
only the fraudulent claim but any other
claim arising under the contract, even if
the fraud is completely unrelated to the
factual or legal basis for the claim.
In the Railway case, the government
awarded Railway Logistics International
(RLI) two contracts valued at
approximately $2.4 million for the
supply of materials for the rehabilitation
of the Iraqi Republic Railway. After RLI
repeatedly failed to meet its contractual
obligations and deadlines, the

government terminated the contracts
for convenience.
RLI submitted a
certified claim for over $6.4 million,
seek ing equitable adjustments as
well as termination costs, including
approximately $2.4 million in alleged
subcontractor and supplier costs.
RLI’s certified claim did not include an
itemization of its costs. During discovery,
the government found a spreadsheet
prepared by RLI that contained the
approximate total amount of the claim
and listed the vendors and subcontractors
to whom RLI allegedly owed various
payments for goods and services.
When the government questioned RLI’s
owner about the spreadsheet during
the trial, RLI’s owner testified that the
claim amount was based on calculations
from the spreadsheet and that the
spreadsheet was a rough estimate. RLI’s
records, however, did not match the
amounts listed in the spreadsheet.
Near the end of the tr ial on the
contractor’s claim, the government filed

a fraud counterclaim, seeking forfeiture
of the contractor’s claim and damages
under the Contract Disputes Act (CDA)
and the False Claims Act. The government
alleged that RLI knowingly submitted a
CDA claim that overstated its costs. RLI
argued that its actions did not rise to the
level of fraud and that, at most, RLI could
be charged with poor record keeping.
Noting that the government had
the burden of providing clear and
convincing evidence that RLI was subject
to forfeiture pursuant to the special plea in
fraud, the Court of Federal Claims ruled in
favor of the government on the counterclaim
and awarded the government almost
$1.2 million in damages. Finding that every
element on the contractor’s spreadsheet
was “overstated or imaginary,” the court
held that the contractor’s spreadsheet
provided clear and convincing evidence
that the contractor practiced fraud
against the United States in the proof,
statement, establishment or allowance of
its claim. In ruling for the government, the
court noted that RLI had “retreated” from

the spreadsheet and had withdrawn a $3
million claim item for lost business at the
start of the trial.
Author’s Note: With the federal
government’s increased scrutiny of
contractor claims for fraud, it is more
important than ever that contractor

claims accurately reflect the contractor’s
actual costs and that the claims be
supported by the contractor’s records.
Contractor claims need to be reviewed
for cost allowability and accuracy prior
to being certified and submitted to the
contracting officer. Contractors must
ensure that there is a factual and legal

basis for every element of the claim. As
demonstrated by the Railway case, the
government may pursue fraud claims
based upon overstated and/or abandoned
CDA claim items, on the theory that these
claim items are baseless and were included
solely for the purposes of inflating the
claim for negotiation purposes. n

Robert S. Peckar, Founding Partner

Robert S.
Peckar

6

PECKAR REPORTS ON
CONSTRUCTION
DEVELOPMENT IN
ISRAEL AND PALESTINE

Robert S. Peckar, Found­­­ing Partner of
Peckar & Abramson, serves as the
National Chairman of Project Interchange,
a n e d u c a ­­t i o n a l i n s t i ­t u t e o f t h e
American Jewish Committee. For 30 years,
Project Interchange has sent delegations
of opinion makers from the United States
and throughout the world to Israel for
one-week seminars to learn about the
complex domestic and international
issues facing Israel. These small seminars
meet with leading academicians, politic­
al leaders, religious leaders, Arab-Israelis
and Palestinians from the West Bank. They
meet with new immigrants, tour strategic
areas and gain great insight into the
enormous complexities of life in that part
of the world.

companies from around the world to
conduct their research in cooperation
with BGU. Among the seminar members
was Marvin Suomi, President of KUD,
LLC., the U.S. development and Public
Private Partnership (PPP) subsidiary of
the Japanese giant Kajima Corporation
(www.kudllc.com). Experienced in PPPs
with institutions of higher learning, Mr.
Suomi, soon after the trip, expressed the
interest of KUD in developing the park.
After several years of master planning,
investment and hard work by KUD,
together with BGU and the city, the project
has become a reality. In late 2011, KUD, the
city and the university partnered with the

impressive Israeli realty company, Gav-Yam,
to invest in the park, known as the ATP. Over
a period of 15 years, the ATP will contain
23 buildings with 2 million square feet of
research and development, becoming
the “Silicon Valley of the Middle East” and
indeed surpassing in size and scope most
technology parks throughout the world. On
adjacent land, the Israeli Defense Forces (IDF)
will soon be constructing their technology
park of similar size. Together, the ATP and IDF
will employ more than 10,000 researchers
and technicians, making Be’er Sheva the new
technology capitol of Israel! As shown in the
photos below and on the following page,
construction has commenced.

AMIR DAJANI, PROJECT DIRECTOR OF THE RAWABI PROJECT NEAR RAMALLAH, EXPLAINING THE PROJECT TO BOB PECKAR

Peckar & Abramson provided legal counsel
to KUD and the ATP, in conjunction with the
Israeli law firms of Yehuda Raveh & Associates
and Gornitzky & Co. Partners Steven Katz and
Mr. Peckar were heavily involved in this effort.

Mr. Peckar recently reported on the pro­gress
of two construction developments in the
region that are connected to his activities
with Project Interchange.
In 2007, Mr. Peckar led a seminar of U.S.
construction industry leaders to Israel.
During their seminar, they visited Ben
Gurion University, located in the biblical
city of Be’er Sheva in the Negev. Be’er Sheva
is a city of almost 250,000 people, striving
to become a new major city in the country.
Ben Gurion University (BGU) (http://in.bgu.
ac.il/en) is one of Israel’s leading universities,
with centers of excellence in research
and development from nanotechnology
to communication technology. During
the visit, the president of the university
pointed out a large area of land adjacent
to the university where he envisioned the
creation of a new, advanced technologies
park that would attract technology

7

PROJECT SIGN AT THE ENTRANCE TO THE ADVANCED TECHNOLOGIES PARK IN
BE’ER SHEVA

In March 2012, Mr. Peckar led a three-day
visit of Project Interchange leaders and staff
to Israel to meet with government leaders,
Project Interchange speakers and others to
strategically plan the next year of seminars.
During that visit, the group went to the
West Bank to a new residential development
under construction just five miles from
Ramallah. The new development, known as
Rawabi, is the first planned city in Palestine
and is the largest private-sector project
ever carried out in Palestine. The new city
integrates international-planning principles,
sustainable environmental practices,
regionally appropriate architecture, stateof-the-art infrastructure, and ease of access
for both residents and visitors. It includes
amenities such as a commercial center, art
spaces, medical facilities, a convention center,

hotel, public and private schools, a major
new mosque and a church, which are
planned to serve the 25,000 anticipated
residents and attract visits by many from
the area. The master plan was done by
AECOM from the U.S. with advisors from
two local universities, the Rawabi technical
team and local firms. The project is
financed by a Qatari government-owned
company and a Ramallah-based real estate
investment firm.
Mr. Peckar reported that the project
impressed him greatly. Among other
aspects of it that he found particularly
impressive was the recycling of water
used in construction, as water is as
precious a commodity as any in the
region. He was also struck by the
safety program, which, to him, was
unprecedented in a developing nation.
Materials are not only coming from Israel,
but also from shops in local villages to
create employment in the West Bank.
Indeed, at the commercial level, the

Israelis and the developers seem to have
found borders to be of less importance
than they are in the political arena.
However, like all things Middle Eastern, the
project is not without its complications.
The imposition of this large, modern city
in the middle of a region dotted with
small villages has drawn concerns among
local Palestinians. Of critical importance,
constant tension and occasional serious
rifts between Israel and the Palestinian
Authority do negatively impact upon
Rawabi’s progress, as political interests
sometimes flex their muscles — creating
practical and logistical problems for the
developer, over which it has no control or
influence. n
For more information about Rawabi, please
go to www.rawabi.ps
For more information about
Projec t I nterchange, please go to
w w w.projectinterchange.org

A LITTLE CORPORATE
HOUSEKEEPING
CAN HELP AVOID
SHAREHOLDER LIABILITY

NEW YORK CITY
DEPARTMENT
OF BUILDINGS
IMPLEMENTS
NEW RULES

Stephen P. Katz, Partner

8
9

Now that tax season is over, and we have
finally caught our breath after attending
to getting tax returns timely filed, it is a
good time to consider some corporate
housekeeping issues that are important to
Stephen P.
Katz
help keep intact the limitation of liability
that corporate entities provide to their
shareholders. While not necessarily the focus of many business
people, the failure to ensure that certain corporate formalities
are being followed can have a serious, negative impact on
the ability of a corporation to shield its shareholders from
the liabilities of the corporation. Creditors can then use the
failure to follow corporate formalities as grounds to “pierce the
corporate veil” and look to the assets of the shareholders of the
corporation to satisfy the debts of the corporation.
To avoid this negative result and better maintain the
limited liability of shareholders, there are several corporate
housekeeping tips that can help avoid having your corporate
veil pierced:
DIRECTOR AND SHAREHOLDER MEETINGS |

The corporation should have annual director and shareholder
meetings, and keep minutes of those meetings in the minute
book of the corporation. Furthermore, decisions that are outside
of the ordinary course of business should be approved by the
board (and, in certain cases, the shareholders), and records
of meetings or written consents approving those decisions
should also be kept with the minutes of the corporation.
The minute
books of the corporation should be updated to contain minutes
of all director and shareholder meetings.
ORGANIZE COMPANY RECORDS |

The directors should review
the bylaws of the corporation to ensure that the corporation
is operating in compliance with those bylaws. Furthermore,
a review of the bylaws will be helpful to determine if changes
to those bylaws are necessary because of new facts and/or
circumstances.
REVIEW THE BYLAWS |

ELECT NEW OFFICERS AND DIRECTORS,AND
REMOVE INACTIVE OFFICERS AND DIRECTORS

Directors and officers who do nothing and are not involved
in the corporation should be removed, and people who will
be involved in the affairs of the corporation should be elected
as officers and directors. Resolutions to that effect should be
prepared and filed in the corporate minute book.

Cesar F. Pereira, Associate

The corporation should be
capitalized in a manner sufficient to keep it running. Courts
will consider the fact that a corporation is undercapitalized in
making a determination to pierce the corporate veil.
REVIEW CAPITALIZATION |

MAKE

SURE

AGREEMENTS

A RE

ARM’S

If the corporation has
any agreements, especially with affiliates, those agreements
should be at arm’s length and should be reduced to writing.
For example, if a shareholder is providing services or assets
to the corporation, the services or assets should be provided
for arm’s length consideration and pursuant to a written
agreement. The absence of such documentation may point
toward a commingling of assets and/or an alter ego status
of the corporation, which are both factors that courts use in
making a determination to pierce the corporate veil.
LENGTH AND DOCUMENTED |

REVIEW

BANKING

AND

9

ACCOUNTING

| I t is ver y impor tant that funds not
be commingled with funds of shareholders or affiliated
entities. A review of banking and accounting records
should be performed to ensure that there is no
commingling of funds. When funds are transferred
between affiliates and shareholders, a legitimate business
reason for such transfers should be documented.
RECORDS

The corporate housekeeping tips listed above are not
exhaustive. Courts will consider many other factors in
determining whether to pierce a corporate veil, including
the presence or absence of fraud, insolvency at the time
a debt is incurred, lack of corporate assets, payment of
excessive dividends, functioning as a facade or an alter
ego of the shareholders, and improper use of corporate
assets. Preserving the limited liability of shareholders that is
afforded by a corporate structure is not difficult, as long as
the corporation is aware of some of the basic formalities that
should be followed to help maintain that protection. n

Cesar F.
Pereira

New Crane Licensing Requirements
The city’s new rules require any new applicant for an operator license to obtain a certification from either the
National Commission for Certification of Crane Operators or another organization accredited by the National
Commission for Certifying Agencies or the American National Standard Institute. Applicants seeking to renew
their operator license will be required to complete an eight-hour refresher course. In addition to requiring
national testing standards for all new applicants, the new rules broaden the experience requirements for new
applicants. Before the rule changes, applicant experience requirements could only be fulfilled by performing
work in New York City. Now, applicants can fulfill experience requirements by performing work in any urban
area within the United States that is of comparable density to New York City.
While it remains to be seen what effect the new rules will have in practice, it is possible that the broadened standards
may increase the supply of qualified operators in New York City. In the meantime, the International Union of Operating
Engineers Local 14-14B, the union that represents a number of the licensed crane operators in the city of New York,
has commenced a lawsuit against the city challenging the new Department of Building (DOB) rules. On June 6, the
court, rejected the union’s efforts to preliminarily restrain the city from enforcing its new rules, and a hearing date had
been set to address the merits of the union’s challenge to the rules.
New Law Regulating Concrete Washout Water
Starting July 1, 2012, it will be a violation of the New York City Building Code to allow any concrete washout
water to enter any sewer, catch basin, drain or body of water, or to leach into the ground. All concrete washout
water will have to be collected and contained in a concrete mixer truck or a watertight container, at least 30
feet away from sewers, for proper treatment and disposal. The new law does not apply to washout water
from minor pours of concrete, such as pours of less than 1.5 cubic yards or that involve less than 60 eightypound bags or 80 sixty-pound bags of ready mix, or from the rinsing of the wheels, undercarriage, or chassis
of concrete mixer trucks. A DOB proposed rule would impose penalties for violations, ranging from $1,200 to
$10,000 per occurrence. n

SAVING THE “PAY-IF-PAID” PROVISION
Adam P.
Handfinger

Adam P. Handfinger, Partner, and Brian A. Shue, Associate

A valuable tool for a contractor to shift the risk of owner non payment is the “pay-if-paid” clause,
which generally provides that the contractor is not responsible for paying subcontractors unless
and until the contractor is paid by the owner for the subcontractors’ scope of work. Per these
provisions, the owner’s payment to the contractor is as an express condition precedent to the
contractor’s duty to make payment to a subcontractor and to a subcontractor’s right to receive
said payment from the contractor.
Brian A.
Shue

10
11

Pay-if-paid clauses are enforceable in
many states, including Florida, as long as
the payment conditions are clearly and
unambiguously expressed. The burden
of clear expression falls squarely on the
contractor. However, even if the clause itself
is precisely drafted, courts may still find the
clause ambiguous and refuse to shift the risk
of owner non payment to the subcontractor,
if there are any inconsistencies between
the pay-if-paid provision and other portions
of the relevant contract documents. This
can be a particularly tricky issue where the

subcontract incorporates the terms of the
prime contract.
A recent Florida case illustrates how a
broad incorporation-by-reference clause
in a subcontract can negate an other­­wise
enforceable pay-if-paid provision. In
International Engineering Services, Inc.
v. Scherer Construction & Engineering
o f C e n t r a l F l o r i d a , L LC , t h e
subcontractor fully performed all work
under its subcontract but did not receive
payment in full from the contractor.

The subcontractor filed suit for breach
of contract. The contractor’s defense was
that the subcontract contained a pay-ifpaid clause, which provided that payment
by the owner was a condition precedent
to the contractor’s obligation to pay the
subcontractor, and that the owner had
not paid the contractor.
The pay-if-paid provision of the sub­contract
stated, in part:
Subcontractor agrees that all progress
payments and final payment to
Subcontractor are contingent upon
and subject to Owner’s acceptance
of Subcontractor’s work and upon
contractor’s receipt of payment from
Owner. Subcontractor agrees to accept
the risk of non payment if Contractor
is not paid progress payments and/
or final payment from Owner, for any
reason. Subcontractor further agrees
that Owner’s payment to Contractor
of all progress payments and final
payment for any work performed by
Subcontractor, other Subcontractors
and Contractor shall be an express
condition precedent to any obligation
of Contractor to make any progress
payment, retainages, or final payment
to Subcontractor.

10
11

The court found that this provision constituted
a clearly expressed pay-if-paid clause, which
ordinarily would be valid and enforceable.
Unfortunately for the contractor, the court’s
analysis did not stop there.
The court also found that the subcontract
agreement incorporated the terms of the
prime contract, which contained the following
provision relating to payment by the owner to
the contractor:
Neither final payment nor any remaining
retained percentage shall become due until
the Contractor submits to the Architect (1)
affidavit that payrolls, bills for materials and
equipment, and other indebtedness
connected with the work for which the
Owner or the Owner’s property might be
responsible or encumbered (less amounts
withheld by Owner) have been paid or
otherwise satisfied.

Therefore, the prime contract provided that
the owner was not obligated to pay the
contractor until the contractor paid all of its
subcontractors, including the subcontractor
at issue in this case. This obviously conflicts
with the pay-if-paid clause in the subcontract.
As a result, the court found that the conflict
made the pay-if-paid provision ambiguous
and thus unenforceable.
It has long been the rule in Florida that
inconsistencies such as this, will render
an otherwise valid pay-if-paid provision
unenforceable. To avoid having the payment
provisions of a prime contract invalidate a
valid pay-if-paid clause, many subcontracts
now include a phrase in the beginning of the
clause, such as “notwithstanding anything to
the contrary contained within the contract
documents.” Such qualifying language may
serve to establish an order of precedence
to address the inconsistency/ambiguity.

However, it is noteworthy that the subcontract
in International Engineering did in fact contain
this qualifying language, and yet the court still
found the pay-if-paid clause unenforceable
in light of the payment requirements of the
prime contract.
The issue presented in this case will need to
be addressed on a project-by-project basis
and after careful review of all relevant contract
documents. The best way to avoid this issue
would be to remove from the prime contract
the requirement that subcontractors be paid
before the owner has an obligation to pay
the general contractor. Where that is not
possible, it may be necessary to limit the way
in which the prime contract is incorporated
into the subcontract, instead of incorporating
the prime contract for all purposes. The way
in which this is done will be critical to the
success of the pay-if-paid protection of the
subcontract to general contractors. n